The pension bill adopted here in 1979 was called one of the state's most significant reforms, one that its proponents swore would pull Maryland from the edge of "fiscal ruin" and future bankruptcy caused by a costly, uncontrolled employe-retirement system.
But four years after passage of the controversial legislation that was supposed to have ended Maryland's pension problems forever, the troubles remain.
Far from leveling off as expected when the bill passed, pension costs have continued to skyrocket. In the last two years, the debt for future retirement costs--money the state will have to pay its current employes when they are all retired 40 years from now--has nearly doubled, from $2.9 billion to $5 billion. That figure is also nearly $2 billion more than experts had predicted in 1979.
Gov. Harry Hughes was told by the state's pension experts recently that he must come up with an additional $103 million--to make a total of $432 million--simply to cover next year's pension costs.
The increase, in this tight fiscal year, means that some programs may not get funded without new tax increases. As with all state programs, taxpayers ultimately bear responsibility for the pension costs.
Now legislative leaders, including some who proclaimed the pension mess solved, are beginning to say that something again needs to be done.
House Speaker Benjamin L. Cardin, who pushed the reform and still hesitates to get back into it, said: "We passed a milestone bill, one that put us on the road toward solvency of the pension program. But it did not do what we thought it would do. We don't have a crisis but we do have a fiscal problem."
Senate President Melvin A. Steinberg put it this way: "We have been driving a Rolls-Royce, but we didn't know how expensive it would be. Now it turns out we can't afford the payments any more. So it's time to tell our employes, 'We have to switch to a Chevy.' "
For weeks now the governor, legislators and actuaries--the insurance statistics experts who tell the state how much it must pay for its pension system--have been trying to figure out what went wrong with the 1979 reform that set up a cheaper retirement system alongside the old, more expensive one.
The answer can be found in economic predictions that did not foresee double-digit inflation, accounting mistakes caused by overly complicated legislative language, and costs connected with political concessions made in 1979 to pass the bill.
In addition, labor groups worked hard to keep as many employes as possible from coming under the new bill; an effort that proved successful and threw off all cost assumptions.
The story began in 1978, when the legislature was told that the decades-old pension system, one of the most generous in the country, would bankrupt the state if left untouched.
For much of the 1970s, the state had paid out of its budget a good portion of what it owed retirees each year. No one had bothered to figure out precisely how much money should be put aside so that the money would be in the bank when state employes and teachers retired.
In addition, in 1971 the legislature granted retirees an annual cost-of-living adjustment (COLA) pegged, without limit, to the consumer price index. Maryland was the only state in the nation with an uncapped COLA. With inflation surging to unprecedented levels, the COLA was causing an annual drain on the budget of about $75 million or more.
By 1978, after an actuary finally evaluated the entire system, Maryland was faced with paying an estimated $2.8 billion in future retirement benefits.
To reduce these costs, members of the joint committee set up to study the issue introduced a bill to establish a new pension system alongside the old one. The new system, which would cover all future employes and which current employes could join voluntarily, also capped cost-of-living increases at 3 percent. It also reduced benefits by about 20 percent and increased the retirement age from the old system's 30 years of service or age 60 to age 62.
To encourage participation, the proposed system did not require an employe contribution. In the old system, 5 percent was taken out of paychecks to cover the employe share. The state would pay the employe's share and would also begin putting extra money in the bank to begin paying off the accumulated debt.
The bill was killed easily that year when members of the General Assembly, who were up for reelection, responded to exceptionally strong lobbying efforts against the bill from labor groups.
A year later, with a new governor (Hughes), a new speaker of the House (Cardin) and a new Senate president (James Clark Jr., who had led the 1978 effort), the measure was passed overwhelmingly.
As a result, Maryland would still be paying millions, even billions, of dollars each year for pension costs, but 40 years down the line, the state supposedly would have enough money in the bank to cover its pension costs.
To pass the pension reform bill that year, Hughes, Cardin and Clark worked out two seemingly minor compromises with the Maryland State Teachers Association (MSTA) and the Maryland Classified Employes Associations, the two groups that most actively opposed the measure in 1978.
The first compromise was agreeing to include a provision that permitted a worker to retire with full benefits after 30 years of service, regardless of age.
The provision had been in the old pension system, but in an effort to reduce cost (younger retirees are a longer drain on a retirement system than older ones) the reform bill set age 62 as the retirement age and eliminated the years-of-service provision. The MSTA was eager to retain it because its members generally begin their careers early and can retire well before age 62.
"We were told that if we made this change we would get 86 votes or so on the floor of the House," Clark recalled. "Someone said that it would cost $400,000 a year, which didn't seem unreasonable. It seemed an acceptable price to pay for getting the bill past."
In fact, as the state's fiscal experts later calculated it, the compromise increased costs by $7 million a year.
Another compromise involved delaying implementation of the new system for several months to give the labor groups time to "educate" the state's 75,000 public school teachers on the new law. MSTA, whose hard-nosed lobbying had been crucial to the defeat of the reform in 1978, used that time to encourage its members not to transfer into the new, cheaper system.
"We went around to every county of the state and held seminars or forums," said MSTA lobbyist Thomas Gray. "We sent out informational packets and we told people to think very carefully before switching."
The effort was dramatically successful. Only 15 percent of the teachers switched to the new system during the first year, a statistic that some point to as one of the major reasons for the failure of the 1979 pension law, undermining one of its core assumptions.
Actuaries had based their estimates of annual costs by predicting that 40 percent of the state's employes and teachers would immediately transfer into the new system because of its variety of cash-saving "sweeteners." Based on that assumption, the actuaries told the state to put aside just under 12 percent of its total annual $2.5 billion payroll for pension costs.
But when few teachers switched, actuaries were forced to recalculate costs and upped the percentage to more than 16 percent. The nearly 80,000 state employes, who were not strongly lobbied by their representatives, transferred much as the actuaries originally had predicted.
The legislature and its fiscal experts also did not realize in 1979 how much the state's pension burden would be increased by salary raises granted teachers by local governments.
Although the state picks up teacher pension costs, salaries are set by local governments without state control. Actuaries had predicted that local salary increases would average 5 percent, but because of dramatic inflation, many local governments boosted salaries more than that. MSTA's Gray said he believes an average pay raise during the last few years was about 6.5-to-7 percent.
So even as the number of teachers in the old pension system dropped by 5,500, the costs climbed.
Perhaps the most unexpected problem resulted from essentially an accounting error by George Buck Co. Actuaries Inc. of New York. The company didn't realize that the cost-of-living adjustments (COLAs) in the old system had to be computed differently, and more expensively than in the new. As a result, Buck underestimated costs by about $40 million a year, a point the company acknowledges. In 40 years' time, that will add about $580 million, according to an actuary for Buck.
The state has since hired a new actuary, who is scheduled to offer suggestions this week for controlling costs. In the meantime, Hughes, Steinberg, Cardin and others are moving toward new legislative efforts to reduce costs.
Steinberg, who in 1978 voted against the reform effort, calling it "pension deform," is planning to introduce a bill that would force all employes to receive future benefits under the new system.
Steinberg also is proposing that money spent for teachers' pensions be frozen or that increases be strictly limited. Both changes, which Steinberg admits will likely take more than this session to pass, would save an estimated $75 million to $90 million annually.
"People have to understand that there's only a finite quantity of money in the state budget," he said. "Unlike the federal government, the state cannot print money and we could end up using most of our resources just to fund our pension plan."
Hughes may back Steinberg's measures or submit a similar proposal. He said he will meet with public employes and teachers unions soon to discuss the issues.
Labor is gearing up to battle the new efforts. The unions are particularly upset about the proposal to end the old system, saying the General Assembly assured them four years ago that the 1979 reform was not a first step toward closing down the old system. Besides, the labor groups note, the new law has been in effect just under three years. "It hasn't been given a chance," said MCEA lobbyist Joe Adler. "Everyone's just panicking."
MSTA'S Gray, who is considering dusting off some cuff links he has that bear the date in 1978 and precise vote when the pension reform was defeated, said, "The point to remember is that we are not just talking budget figures. We are talking about people's lives once they retire."